Could a July rate cut be off the table?
The Bank of Canada struck a relaxed tone on the economic outlook after its June 5 interest rate decision, boosting market confidence that a second consecutive rate cut could be on the way in July. But could a surprising inflation uptick in May have cast its plans into disarray?
New data released by Statistics Canada on Tuesday (June 25) showed an unexpected increase in the annual inflation rate in May, with that acceleration marking the first time in four months the consumer price index (CPI) has increased.
Economists polled by Bloomberg expected the annual inflation rate to come in at 2.6% – but it increased to 2.9% instead, hovering close to the outer limit of the Bank of Canada’s target range.
Market observers weigh in on latest reading
While the core measures watched closely by the Bank saw their largest increases since December, hopes of a July rate cut aren’t dead in the water just yet.
Bank of Montreal (BMO) continues to expect the central bank will make its next cut in September – but chief economist Doug Porter indicated in a note following the latest inflation data that a move to lower rates next time around remains a possibility.
He said the next inflation reading, scheduled for July 16, could prove a critical factor in influencing the Bank’s decision to hold or cut in July. “No bones about it, this is not what the Bank of Canada wanted to see at this point, and clearly shaves the odds of a follow-up July rate cut,” Porter wrote. “However, it doesn’t rule out such a move, as we will see one more CPI.”
Royal Bank of Canada (RBC) assistant chief economist Nathan Janzen, meanwhile, described May’s inflation numbers as “the first significant upside of 2024”.
Still, he pointed to possible welcome news ahead for the Bank as it maps out the path on inflation. “The upside surprise in May CPI growth will put more focus on the June CPI numbers to be released ahead of the next policy rate decision in July,” he said. “But softening per-capita GDP and rising unemployment also increase the odds that price growth will continue to broadly slow.”
For Samantha Villiard of RE/MAX Canada, the continuing determination of Canadians to forge ahead with homebuying plans is part of the reason for “cautious optimism” on the housing market outlook for the remainder of the year and looking ahead.https://t.co/biWhXVtDhu
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 24, 2024
How will housing and mortgage markets react to latest inflation data?
The Bank’s decision to cut rates by 25 basis points at the beginning of this month came as welcome news for many homeowners who had seen borrowing costs jump substantially since its rate-hiking path began in March of 2022.
The Canadian Real Estate Association (CREA) said upon the release of its latest housing market statistics that the onset of central bank rate cuts could bring a measure of optimism to the housing and mortgage outlook after a bumpy couple of years.
Still, that unanticipated jump in inflation for May showed nothing can be taken for granted in the months ahead – and homeowners should continue to brace themselves for an unpredictable second half of the year, according to a Nova Scotia-based mortgage broker.
David Clarke (pictured top) of Clarke Mortgage Group (part of TMG The Mortgage Group) told Mortgage Professional that he was offering no guarantees to homeowners about the prospect of imminent relief, especially given the lack of clarity on inflation and the Bank of Canada’s intentions.
Focusing on the here and now is Clarke’s main priority when dealing with clients. “My advice is that we don’t have a crystal ball to know how long this is going to take to get more comfortable,” he said. “The conversation’s just been cash flow, cash flow, cash flow. Everybody’s struggling – it’s the people making $100,000 and the people making $40,000. It’s everybody.”
Making sure that borrowers are steeled for the worst means they should be able to withstand whatever twists and turns the market – or interest rates – might take looking ahead, he said. “I’ve been trying to remind them that it’s OK. It got expensive quickly,” he explained. “Nobody saw this coming, but because we don’t know what the future’s going to be, it can be dangerous to predict sometimes.
“Maybe it’ll be cheaper in a year. I’ve been trying to make them think, ‘What could possibly go wrong financially?’ and the truth is they don’t think about it until I ask the question. I think there’s going to be a lot of people going through a lot of hard times and it’s not close to being over.”
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